Napatech

Hello and welcome to NAPA Tech Q1 2021 IMS. Today, I am pleased to present CEO Ray Smetsen and CFO Aine Salsgaard. Please go ahead with your meeting.

Good morning. I'm pleased to welcome you all to NAPA Tech's Q1 2021 Interim Management Statement presentation. I'm Ray Smets, CEO of NAPA Tech. I'm joined today in our offices in Copenhagen by Heine Thorsgaard, our Chief Financial Officer. Today's Q1 2021 IMS was released earlier this morning on the OSCE and is available on the investor relations page of our website at napotech.com. For your information and recording of this webcast, we'll also be available on the NAPA Tech website as soon as possible later today. Next slide. As always, we want to be available to answer your questions. We'll answer your questions at the end of our presentation via text, which you can submit on the webcast page using the button below our presentation. We can also take your questions over the phone if you prefer. If you'd like to ask a question, please follow the instructions on this slide. Next slide, please. Please note that this presentation contains forward-looking statements that are subject to a number of risks and uncertainties. Our actual results may differ from those discussed in forward-looking statements. Next slide, please. So let's get started. I'll present a summary of key financial achievements for Q1 an update about our business and market, as well as review our progress on key partnerships and design wins. Heine will then provide a detailed review of our Q1 2021 financial results, and then I will close with a review of our outlook for the full year 2021. Next slide, please. Q1 2021 started on track and as expected. We delivered revenue growth of 6% year over year against a very strong Q1 last year, helped by strong sales to existing and new customers. In addition to delivering good revenue growth in Q1, we generated solid gross margins of 70% within our annual guidance and up from the prior Q1 of 2020. This is a continued validation of our value proposition in the market. On the earnings front, EBITDA, EBITDA and overall earnings were significantly up year over year, demonstrating the overall strength of our business, from the top line to the bottom line. With these results, we have delivered 10 quarters in a row of year-over-year revenue growth adjusted for the 2018 sale of our underperforming Pandian product line, and we delivered a combination of year-over-year revenue growth and profit for the fourth quarter in a row. As we have been demonstrating throughout the last year, during a year of uncertainty and challenges due to the global pandemic, Napotex products have resonated well with our target markets. We have navigated the choppy waters around supply chain disruptions too. One of the key areas we've been carefully watching is the current general industry supply chain issues for semiconductors and other vital components. We have done a great job staying ahead of this evolving worldwide challenge by opportunistically securing component supply well in advance to assure that we have them in place to support our planned revenue goals for the year. We did that again in Q1, and we feel that we are managing these risks well under the circumstances. Heine will review more financial details later in this presentation, but we're on track as expected in our first quarter of 2021. Next slide, please. Now I'd like to walk you through Napa Tech's business highlights, quickly summarizing what we do, how we target our market, the key customers we want in Q1, and an update on several of the key press releases we made since we last presented. Next slide, please. Over the recent past, we have strived to fulfill our promise to drive our business further, earning a path to the next level of growth. We created momentum with good execution, building best-in-class FPGA-based SmartNICs and software, solving real-world problems, accelerating applications and growing market segments like networking and security, 5G mobile, cloud and edge, and financial services. We help make networks faster, and we're making servers more powerful while reducing customer data center costs. All of this is real value for customers solving problems today. And with this momentum, the future looks bright. Our solid core product momentum that we have been demonstrating creates a stable foundation for growth, driving healthy cash flow to keep up our investments in product innovation. This in turn is demonstrating our success at creating new revenues from our new product initiatives that increase our potential to win new important and key design wins and gaining traction with new partnerships as we have revealed over the last few months. This kind of progress will truly move the needle in significant ways over the next few years. So I'd like to say that we have earned a path to the next level, but the work really has just begun. We remain committed to keep up the good efforts and bring Napa tech into the center of the spotlight where we can make a big impact. Next slide, please. Here's a summary of some, but not all logos of the customers that brought bought Napa tech products in Q1. As I did last quarter, I categorize their logos into key market segments like networking and security, telecom and cloud government and defense and financial technology. where we often target our SmartNIC solution sales. We had important sales in all of these segments with solid recurring business customers in the networking and security and telecom and cloud categories, including key growing customers like IBM, LiveAction, Emergent, and PolyStar, just to name a few, and new momentum with Quantia, Viavi, and Arteza networks. On the cloud and telco side, we continue to extend our business with Facebook, And we are gaining traction with GoDaddy, who is an important new customer that we are working hard to build momentum with. We're doing this all while building business momentum with key service providers like Orange, KT, NTT, Vodafone, BT, and Verizon, all from Q1. In these domains, higher speeds and the need for better performance is driven by 5G, increasing security threats, the need for greater visibility, and faster processing of packets, and the transition to software-defined networking. The Napotex solution offers advantages in all of these areas. We also saw good orders in the government and defense segment with customers like Ryan Mittal, Accelio, and ClearTrail, but also Jet Propulsion Labs, Airbus Defense, and a number of defense agencies from various countries around the globe. In these use cases, mission-critical apps need higher performing performance with zero packet loss, but with greater visibility and network control. On the fintech front, we continue to earn business with key OEM customers like Pico Corelight, Velocimetrics, and Refinitiv, and end-user customer business with Citadel, Maven, and we took an order from a new customer who is building a soon-to-be-opened exchange called Elemax. Overall, we're pleased with our customer wins in Q1, which is seasonally our slower quarter of the year as we build momentum as our year continues to mature. Next slide, please. As we've reported before, we like to keep our investors updated on the latest views of the overall NIC market, and specifically the smart NIC market. Our goal for showing this information is to assure our investors that we are approaching a large and growing market with plenty of headroom to thrive and grow. In the latest report showing the full year of 2020, recently released, the total overall NIC market is expected to approach $2.9 billion this year in 2021, growing at about 23% year over year compared to 2020. This new report also shows the newly revealed forecasting for 2025 of 5.6 billion. In total, the overall market is expected to grow at a very healthy 32% CAGR through 2025. This overall NIC market is divided into three major segments, The basic NIC market is the blue segment of the bar chart, and it's the low-cost, low-margin part of the market that offers basic fixed-function NICs with no programmability. NAPA Tech does not participate in this segment. The offload NIC market, listed in green on the bar charts, is dominated by non-programmable ASIC processors, offering little in the way of flexibility or application accelerations. Napa Tech is not focused here per se, but we try to convince some of this market to come our way for the right use cases. And lastly, the programmable NICS segment, which is the orange bar on the bar chart, often called the smart NICS segment. That's where the highest performing solutions reside. These smart NICS deliver ultra high speed networking functionality with the ability to be reprogrammed and enhanced with new software to meet the ever changing customer requirements for high performing mission critical apps. Napa Tech is keenly focused on addressing the programmable NIC market segment. As reported by Omdia, the programmable NIC market is the fastest growing segment of the overall NIC market. In the recently released report from January 2021 for the full year 2020, Napa Tech continued to rank number three amongst the vendors in the segment. And we are the largest vendor making commercial smart NIC technology with FPGAs behind Marvell and Broadcom. We use a system on chip solution. Next page, please. Leaving the other NIC segments aside for just a bit, let's focus on the programmable NIC market, which is NAPATEC's target market. It is comprised of a combination of two kinds of companies, namely self-builds and vendors. As you can see on the left side of this chart, the programmable NIC market is largely held by two large self-build players, Microsoft and Amazon. who up to this point don't buy commercially, but prefer to make their own programmable NIC cells for their own use. The other companies in this market are vendors who make the smart NICs for companies to buy and deploy. That's where we exist. The pie chart on the right side of the slide focuses only on the vendors. In this part of the programmable NIC segment, Napa Tech ranks number three amongst the vendors, and we remain the largest vendor making commercial smart technology with FPGAs. I always like to say we're well positioned in this market. We are large and meaningful, but we are agile and growing. I believe this paints a good picture of where we stand in our prospect for growth in this fast growing and emerging market. Next slide, please. We've been working hard and these are the headlines of some of the achievements and progress we've been making in 2021 so far. As we presented already, a recently announced partnership with Lenovo is noted as an important step for Napa Tech. Lenovo is a top three server maker with long and deep relationships with the kinds of customers we want to get access to. In this partnership, we bring our latest solution focused on virtual networking to their market, running our newest link virtualization SmartNIC software designed to accelerate apps and services, meeting the most demanding virtual requirements of 5G mobile, telecom operators, and cloud service providers. Napa Tech estimates the revenue potential of this design win to exceed $10 million over the life of the product with initial customer orders potentially starting in the back end of 2021 and ramping into 2022 and beyond. Another key partnership we presented is with Silicon, a well-respected industry leading provider of high performance networking and data infrastructure solutions. Napa Tech software will power the Silicon SmartNIC, which is based on the Intel FPGA SmartNIC reference design. This is a partnership to bring Napa Tech's link virtualization software combined with Silicon's leading FPGA SmartNIC to the market. And we're excited about this new partnership with our friends at Silicon. And we work hard to make Silicon win new deals, help them win new deals, which is a win-win for both companies. We issued a press release a few weeks back about our participation in the new Kinetic Edge Alliance, the edge computing ecosystem hosted by Vapor.io. In this alliance of emerging tech companies, it is focused on the first fully integrated hardware and software systems for edge co-location exchange and networking services. Edge computing will deliver the next wave of network and data center infrastructure, Vital to support 5G, autonomous vehicles, and many other exciting technologies and applications. NAPA Tech will work with the other members of the SECO system to define, integrate, and validate multi-vendor, end-to-end solutions that result in the delivery of high-performance edge applications and services. Our goal is to be an integral part of this evolving edge computing network. As we noted in our Capital Markets Day presentation recently and yesterday, we published in a joint press release, NAPA Tech's partnership with Acronix is beginning to take shape, focused on bringing new powerful FPGAs to our customers while aligning our software solutions with Acronix's target customer market. Acronix is a leader in FPGAs and embedded FPGA IP. In this partnership, it gives each company access to each of our best-in-class solutions. we intend to combine the Acronix Speedster 7T FPGA with Napotex SmartNIC software, giving both companies a win-win in an effort to provide a feature-rich, high-performing solution to a growing set of data center operators and 5G mobile telecom service providers. We expect this will give us better access to the opportunities that we are growing in the hyperscale and service provider 5G markets. We are also excited to reveal a new design win with an important cybersecurity OEM customer who has selected Napotex software and hardware to improve the speed and accuracy of their newest enterprise-grade cybersecurity appliance. In this application, they protect networks combining two of the most powerful open-source cybersecurity applications into a powerful commercial-grade offering, transforming network traffic into actionable data for analysis, forensics, and real-time response. This is the fourth design win with this important new customer over the last year, which is already producing revenue for Napa Tech. This customer has asked Napa Tech to keep their brand anonymous. Next slide. I promised almost three years ago when I took the role of CEO of Napa Tech to stay keenly focused on our core competencies and building software on FPGA-based SmartX. Also with this, we have been executing on a three-prong strategy to grow our business. and this strategy has served us well. Our plan for growth is to focus on our product strategy where one, we expand our core product revenues with new competitive features. Two, grow new product revenues with inline features to access and address new firewall market opportunities. And three, gain traction in the fast-growing virtual use cases with an addressable market needing apps deployed as a virtual instance on a virtual machine. such as in 5G Mobile or Cloud and Edge. This multi-pronged approach assures that we are delivering revenues on a solid foundation and core expertise while enthusiastically building new revenues in areas where we think we can win. Next slide, please. Let's finally get into the financial details. I'd now like to turn the call over to Heina Thorsgaard to review more details about our Q1 2020 results.

Heina? Thank you. Slide 14, please. Revenue in USD in Q1 was up 6% compared to last year, but due to the weakened US dollar, revenue in DKKL fell 4% compared to Q1 of 2020. Gross margins in Q1 ended at 70%, up 1.2 basis point compared to Q1 last year. Our staff costs and other external costs amounted to 30.4 million in Q1 compared to 33.5 million in Q1 of 2020. EBITDAQ in Q1 amounted to 2.4 million compared to 0.1 million in Q1 last year. Staff costs transferred to capitalized development costs in Q1 amounted to 6.4 million compared to 3.9 million in Q1 of 2020. This growth reflects the capitalization of our virtualization products and the increased activities related to these development products compared to last year. EBITDA in Q1 amounted to 8.8 million and EBIT amounted to 3.6 million compared to EBITDA of 3.9 million and EBIT of negative 1.9 million in Q1 last year. The result for Q1 amounted to 5.2 million compared to negative 1.9 million in Q1 2020. Slide 15 please. Net cash flows from operating activities in Q1 amounted to negative 12.5 compared to positive 3.4 million last year. End of Q1, net working capital was 26.4 million compared to 17.8 million end of Q1 2020. In the quarter, our working capital grew 21.3 million and compared to end of Q1 last year, our inventories are up almost 10 million. We have proactively been sourcing components for some time due to the uncertainty around the supply chain. in order to secure our production needs and we feel comfortable with our current supply chain situation. Net cash used in investing activities in Q1 amounted to 7 million compared to 3.3 million in Q1 of 2020. Free cash flows in Q1 amounted to negative 19 million compared to 0.1 million in Q1 last year. Cash and cash equivalents end of Q1 amounted to compared to 63.7 million end of Q1 last year. Back to you, Ray.